More From LendingTree

LendingTree Debt Report December 2018

Chris Horymski

If holiday spending is even slightly more than the $49 billion increase in revolving credit spending during the 2017 holiday season, total consumer debt — excluding mortgage-related debt — will eclipse $4 trillion by the end of the year.

Historically, increases in interest rates haven’t put the brakes on consumer borrowing. On the contrary, consumers continue to borrow at ever increasing levels.

Consumers will have more than $4 trillion in debt after the holiday season

As of October, Americans have a cumulative $3.45 trillion in non-mortgage debt heading into the holiday spending season. Early projections suggest that retail spending will be somewhat higher than last year. If overall holiday spending is similar to this year’s 5.1% increase over 2017 — as reported by Mastercard SpendingPulseTM — total consumer debt, excluding mortgage-related debt, will easily eclipse $4 trillion by the end of the year.

Increases in interest payments also accelerating

MagnifyMoney data show that Americans pay more than $100 billion in interest annually to credit card issuers. Note: MagnifyMoney is a subsidiary of LendingTree. Every quarter-point Fed rate increase since 2015 has resulted in an additional 1% to 2% annual increase of that figure.

On top of that, regulators recently approved an increase for late fee payments in 2019. For most personal credit cards, those late fees will increase an extra $1, to a maximum of $39.

Stack four quarter-point Fed funds rate increases together like those made in 2018, and that means a projected increase of close to $9 billion in additional interest payments and fees in 2019, on top of the $103.7 billion in 2018.

Another rate hike means debt levels will accelerate

As the Federal Reserve continues to increase interest rates a quarter-point at a time, expect credit card APRs to go up in lockstep over the next two months. Currently, the average credit card APR is at 16.46% and is set to tick higher after the Federal Reserve’s quarter-point rate increase in December. LendingTree estimates the 0.25 percentage point increase, which almost immediately gets passed on to credit card borrowers carrying balances, will collectively result in an additional $2.4 billion in interest payments.

Higher rates doesn’t mean less borrowing

Intuition may suggest that increasing borrowing costs reduces demand to borrow, but the data doesn’t always bear that out.

This isn’t the first time the Fed has repeatedly and persistently raised the Fed funds target rate.
Between 2004 and 2006, the Fed raised the federal funds rates 17 times, from an initial 1% level to 5.25%. But during those two years, consumer borrowing continued to rise. Also, delinquency rates on consumer borrowing declined during that period.
Similarly, the Federal Reserve increases that began in December 2015 — nine so far — haven’t dampened consumers’ appetite for borrowing, nor have delinquency rates increased over that time.

Of course, 2006 didn’t end well. Home prices collapsed, and with it the source of many consumers’ wealth and ability to borrow further. But 2018, at least in that respect, doesn’t resemble the housing bubble of a decade earlier.